What is Ultimate Net Loss?

The Ultimate Net Loss is the amount that is claimed for the settlement. The reinsurer is liable to pay this amount after deductions are made from recoveries. When an individual chooses insurance, the insurer, to protect itself against the threat of losing the whole amount, reinsures some of its amounts.

Throughout this process, when the policyholder claims for the due amount because of any mishappening or event, the loss which insurance company bears is said to be the ultimate net loss. An ultimate net loss can also be defined as the situation when all sums for which an insured is legally liable to pay for the damages. Such damages may include body injuries, any accident, property damage, etc. The loss will be reduced by a Deduction for all salvage or recoveries which have been or will be paid. This loss will be the ultimate net loss.

Ultimate Net Loss Formula

Here is a formula to calculate the ultimate net loss.

Ultimate Net Loss = Gross Loss - Recovery from the Reinsurer

Here,

• Gross Loss = the total loss which an insurance company faces
• Recovery from reinsurer = the amount reinsurer is liable to the policyholder (reinsurance helps Insurance companies remain insolvent even after major disasters.)

Ultimate net loss, in short, is explained as the loss born by the insurance company after deducting the recovery from the reinsurer for which it was liable.

Factors Affecting the Ultimate Net Loss

The insurance companies are capable of protecting themselves against any big ultimate net losses by sharing their policy risk with the reinsurers. The portion of the amount reinsured by the insurance company is an important Factor that affects the ultimate net loss. When the insurer shares the amount with the reinsurer, the amount is protected by the reinsurer, and hence the lesser losses occur to the insurance companies.

Example of Ultimate Net Loss

Let’s take an ultimate net loss example here. Suppose an insurance company receives Rs 20,000 in annual premiums for a Rs 10,00,000 policy. Now, the company, to protect itself against the threat of Rs 10,00,000 loss due to any disaster and mishappening, might cede Rs 10,000 of the annual premium to the reinsurer, who would agree to cover Rs. 5,00,000 of the potential loss. Here, loss for the insurer is when the claim is received. In contrast, the ultimate net loss is the loss retained with the company after reinsurance recovery, salvage, or any third-party recovery.